Weekly market commentary

We flagged two signposts to dial up risk-taking after the Middle East conflict led us to reduce risk and turn neutral on U.S. equities a few weeks ago. First: evidence of actions that could re-open shipping traffic in the Strait of Hormuz. Second: signs that any lingering macro impact is contained. We eye developments on both fronts. Plus, corporate earnings expectations are up even through the conflict, partly on the AI theme. We go back to modest risk taking and turn overweight U.S. stocks.

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Earnings unscathed
Earnings growth expectations for 2026, year-on-year growth

Talks between the U.S. and Iran broke down over the weekend, but we think the fact that they began in the first place indicates that there are strong economic incentives for all parties to end the conflict. We saw two signposts that would lead us to re-up risk after reducing it a few weeks ago. First, tangible evidence of actions that would reopen flows through the Strait of Hormuz. And second, visibility on the lingering macro impact being contained. This comes as expectations for corporate earnings have climbed for both the U.S. and EM for 2026 – even since the conflict began on Feb. 28. See the chart. We see the AI theme at play in both. Companies in South Korea and Taiwan – key producers of the hardware needed for AI – are driving EM earnings upgrades. In the U.S., the forecast 80% boost to semiconductor stock earnings this year are helping drive upgrades in tech and overall, LSEG data show.

We are eyeing developments on both of these signposts. A breakdown in U.S.-Iran negotiations over the weekend could add to near-term pressure on risk assets. But both countries agreeing to start talks is concrete evidence of economic incentives to de-escalate, in our view. China’s role – and U.S. President Donald Trump’s planned summit with Chinese President Xi Jinping in mid-May – is likely factoring into those economic incentives. Flows through the Strait of Hormuz would need to pick back up for a sustained positive impact on markets. We use our proprietary tracker to monitor traffic through the strait. In terms of the macro impact, we see it as significant and don’t necessarily expect a return to the environment in place before the conflict began – but think other drivers can outweigh that impact and go back to moderate risk taking on a tactical horizon.

Valuations down, earnings expectations rising in U.S. tech

One of those drivers? Corporate earnings getting revised up, even as equities have pulled back. Tech’s valuation premium has been eroded, with the 12-month forward valuation of the U.S. IT over other sectors at its lowest level since mid-2020. At the same time, the tech sector is now seen posting earnings growth of 43% in 2026, up from 26% last year. These bright spots partly inform our upgrade to U.S. equities. AI earnings exposure also contributes to our modest EM overweight. We are funding this equity upgrade by reducing our cash-like preference of front-end euro area government bonds, which we took a few weeks ago after a sharp pricing in of European Central Bank rate hikes early in the conflict.

We will keep emphasizing thematic opportunities accelerated by events in the Middle East – and think those exposures will benefit no matter the outcome. We saw mega forces creating a world shaped by supply factors such as tariffs and labor constraints before the conflict began – and think this will persist after it ends. We see geopolitical fragmentation supporting defense and aerospace, spurring governments to push even harder for energy independence and leading companies to invest more in supply chain resilience. Along with the AI theme, that will drive demand for infrastructure and power.

Our bottom line

We see evidence of economic incentives to end the U.S.-Iran conflict. We turn moderately positive risk and like U.S. stocks as a relative preference, seeing them holding up better even if absolute performance disappoints. We also turn overweight EM stocks and still favor thematic opportunities like defense.

Market backdrop

A U.S.-Iran ceasefire saw brent crude fall below $100 a barrel, the S&P 500 gain about 3.6% on the week and 10-year U.S. Treasury yields off their highs at 4.32%. A breakdown in negotiations on Sunday could see a partial unwind of those moves. The impact of higher energy prices had yet to show in March U.S. core inflation and would need to stay higher for that to happen. But inflation is still too high to achieve the Federal Reserve’s 2% target anytime soon, dimming hopes for rate cuts in 2026.

The U.S. PPI will show if energy-driven cost pressures are still pushing prices upward after February's data came in higher than expected. The U.S. March CPI showed a surge in energy inflation at the headline level but limited impact in core inflation. In China, we expect to see signs of modest but steady growth as external demand – rather than domestic momentum – gradually powers a recovery.

Read our past weekly market commentaries here.

Big calls

Our highest conviction views on six- to 12-month (tactical) and over five-year (strategic) horizons, April 2026

Tactical granular views

Six- to 12-month tactical views on selected assets vs. broad global asset classes by level of conviction, April 2026

We have lengthened our tactical investment horizon back to six to 12 months. The table below reflects this and, importantly, leaves aside the opportunity for alpha, or the potential to generate above-benchmark returns – especially at a time of heightened volatility.

Euro-denominated tactical granular views

Six to 12-month tactical views on selected assets vs. broad global asset classes by level of conviction, April 2026

We have lengthened our tactical investment horizon back to six to 12 months. The table below reflects this and, importantly, leaves aside the opportunity for alpha, or the potential to generate above-benchmark returns – especially at a time of heightened volatility.